Financial repression: here to stay and stronger than ever
Households and investors are foregoing billions as central banks keep interest rates low, our research finds.
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Financial repression – governments' use of monetary policy and market intervention to influence how capital is allocated – is depriving households and investors of billions in interest income each year.
We calculate that financial repression reached a new high in March 2020 and stayed at that level in June, driven by the massive US and European monetary policy response to the COVID-19 pandemic.
The two outcomes of financial repression are low interest rates and price increases in financial assets. These have a large and unequal impact on returns to savers and institutional investors.
We estimate that US households have sacrificed USD 160 billion per year on average since 2008 from lost interest income on deposits, pensions and life insurance assets. This equates to a net "tax" of about 3.5% on US households' disposable income each year.
Long-term investors such as US and European pension funds and insurers are also losing out, foregoing USD 185 billion of yield income, equivalent to about 1.5% of their total fixed income investments, per year on average.
We believe that the costs of financial repression outweigh the benefits. The lesson of the global financial crisis is that exiting ultra-easy monetary policy becomes harder with time. As this environment persists, we believe it is crucial that governments review the cost-benefit analysis of their policy mix to ensure the impact is sustainable for the long term.